Don't Let Banks Become Casinos
Citing the pressures of rigorous worldwide competition in financial services, large American banks are pleading for the repeal of the Glass-Steagall Act, a law that keeps banks out of the more volatile and risky world of securities transactions. Their entreaties should be resisted. The reasons the act was passed are still valid, and it has not interfered with our ability to compete internationally.
The Glass-Steagall Act of 1933 evolved from the bitter experience of the Depression, when American banking was in shambles. Left free to speculate in the 1920's, banks naturally looked where profits seemed highest, and were inevitably drawn into risky propositions. When a few banks failed, depositors nationwide panicked. Runs on banks pushed this country over the brink of financial disaster.
Stability was restored only years later, after the Federal Government insured depositors' money and imposed tough limits on the kind of risks a bank can undertake.
Today's bankers promise they will be more careful. But to accept their assurances runs counter to the simple principles of fairness and common sense. Banks want to keep the Federal insurance that attracts depositors and then use that capital to compete against traditional, unsubsidized securities firms.
No one could complain if banks renounced their Federal insurance and then competed evenly against securities firms. But the banks simply should not be allowed to gamble with taxpayer insured dollars.
The banks' proposals also defy common sense. Given the chance to speculate, some institutions are going to gamble poorly. This in turn will undermine confidence in the whole banking system. The recent experience of the thrift industry reinforces this lesson. Congress stepped in with $10.8 billion to bail out the thrift industry. A bailout of the much larger commercial banking sector, if it got into a similar problem, would make the recapitalization for thrifts seem insignificant.
Critics of the Glass-Steagall Act prefer to downplay the risks to the Federal Government and instead focus on the internationalization of the marketplace. They argue that they are unable to compete because foreign banks are free to violate the principles of Glass-Steagall. It is true that seven of the 10 largest banks are Japanese, but this has nothing to do with the Glass-Steagall Act.
Indeed, the Japanese operate under a law imposed after World War II by Gen. Douglas MacArthur that is, if anything, more restrictive than Glass-Steagall. Japanese banks are bigger because of the decline of the dollar, the healthy rate of Japanese savings and the absence of full-throttled competition within Japan.
The Japanese version of the Glass-Steagall law has not inhibited Japanese banks from successful competition abroad. Very few American consumers or businesses refuse to patronize a Japanese bank with more competitive interest rates simply because a type of Glass-Steagall law exists in Japan.
Moreover, the tremendous size of the Japanese banks is misleading. American banks complain that Glass-Steagall inhibits profitability, yet from 1983 through 1986 American banks enjoyed greater profitability than their Japanese competitors. While American banks have emphasized profits at the expense of growth, the Japanese have pursued a policy that has favored size over profits.
Japanese banks have been able to grow so large not because of a freedom to speculate but because of barriers that protect them from foreign competition. With a protected profit base at home, Japanese banks can engage in sharp competition abroad.
To help our banking and financial system, we should insist that the Japanese open their banking markets to foreigners, just as we have done in the United States. A level playing field is the best assistance we can give our banks in the world of international competition.
To understand what our financial industry would be like without the Glass-Steagall Act, we need only look to West Germany, where no such restrictions exist. The West German financial system is dominated by a few large banks. Like most large corporations, they are risk-averse. Capital for any risky venture is scarce.
As a result, West German banks are superb at lending to established institutions. But entrepreneurs with new ideas often have to come to the United States to find financing. The Glass-Steagall legislation is therefore a competitive advantage in a world where entrepreneurs require ready access to capital.
The solution to the problem of internationalization is not the abolition of the Glass-Steagall Act but an approach that would protect the integrity of the federally insured program, continue to guarantee and separate stable pools of both high- and low-risk capital and open foreign markets to American banks. How do banks respond when the need for these important protections are cited? They suggest that walls be built within their organizations that would keep their risky activities separate from traditional banking activities. Numerous experts have noted the difficulty of separating such operations, particularly when decisions about whether to buy a subsidiary's securities - decisions that are theoretically objective -can mean a profit of millions of dollars.
Even if these decisions are made objectively, one must wonder why it is the duty of the Federal Government to insure banks that provide capital to risk-takers when that can already be handled by an increasingly competitive worldwide securities industry.
The answer, of course, is that banks see big profits in securities. But if a bank thinks it can make more money as a securities firm, let it become one. Let's not destroy a stable structure that, since the Depression, has provided capital for entrepreneurs, confidence for depositors and healthy profits for America's financial service companies.
No comments:
Post a Comment